Consultation on Coffey Review - KPMG Response 30 January 2018 - Finance.gov.ie
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Consultation on Coffey Review KPMG Response 30 January 2018
Consultation paper on review of Ireland’s Corporation Tax Code Tax Policy Division Department of Finance Government Buildings Upper Merrion Street Dublin 2 D02 R583 email: ctreview@finance.gov.ie. 30 January 2018 Dear Sirs KPMG response to Consultation on Coffey Review We are pleased to enclose our submission in response to the public consultation by the Department of Finance on the review of Ireland’s Corporation Tax Code. Ireland’s corporation tax regime has formed an important part of Ireland’s policy initiatives which serve to attract and retain foreign direct investment (FDI) as well as making Ireland an attractive location for domestic entrepreneurs to conduct business through corporate entities. KPMG acknowledges the continuing importance to Ireland of ensuring that its corporation tax regime maintains its competitiveness from an international perspective whilst aligning the regime with international developments emerging from the OECD’s project on Base Erosion and Profit Shifting (BEPS) and related initiatives under the European Union (EU) Anti-Tax Avoidance Directive (ATAD). We have responded to all of the questions in the consultation and grouped our responses into three areas: ■ Ireland’s implementation of anti-BEPS measures contained in ATAD, ■ Recommendations for consideration in relation to Ireland’s transfer pricing regime as set out in the Review of Ireland’s Corporation Tax Code by Seamus Coffey, and ■ Considerations relating to the adoption of a more territorial regime for taxation of foreign profits together with suggestions related to simplifying Ireland’s existing regime for granting double tax relief. In overall terms, we consider that Ireland’s corporation tax regime is well positioned to meet the new requirements for corporation tax regimes. However, like any other jurisdiction, Ireland faces challenges in adopting these measures and knitting them into its existing regime in a manner that is experienced by business as an evolution and not a revolution in approach. Certainty of tax outcomes promotes and sustains investment by business. In framing our responses, we believe have balanced the requirement for Ireland to align its regime with these new international standards with implementation changes that should be experienced as an organic evolution of the regime. We have also looked ahead to test how the combined effect of our suggestions across these three areas could work in the overall context of Ireland’s corporation tax regime. The contact for this submission is Sharon Burke. Email: sharon.burke@kpmg.ie. Direct line: (01) 4101196. Sharon Burke
Contents
Preface
Executive Summary 1
SECTION 1: Anti-BEPS Measures contained in ATAD 10
Question 1 : General Anti-Abuse Rule 12
Question 2 : Controlled Foreign Company regime 17
Question 3 : Exit Taxation 33
Question 4: Hybrid Mismatch measures 38
SECTION 2: Ireland’s Transfer Pricing Regime 44
Question 5 : Adoption of 2017 OECD transfer pricing guidelines 46
Questions 6 -9 : Domestic transfer pricing regime 52
SECTION 3: Adopting a Territorial Regime 61
Question 10 : The effects of moving to a territorial tax base 63
Il ustrative examples, application of transfer pricing principles and CFC
APPENDIX 1: rule under Option B
79
APPENDIX 2: Overview of branch exemption regimes 82
Suggested wording for the revision of paragraph 9FA, Schedule 24,
APPENDIX 3: TCA 1997
85
Preface
Envisioning Ireland’s future tax regime
KPMG welcomes the opportunity to respond to this consultation on recommendations
set out in the Coffey Review of Ireland’s Corporation Tax Code.
KPMG is the largest provider of business taxation advice in Ireland. We have drawn on
our experience of providing advice to businesses across a range of sectors to provide in-
depth comments in response to the consultation questions.
The consultation address a series of complex matters which will be of fundamental
importance in shaping Ireland’s future corporation tax regime.
Our responses set our suggested approaches to: on concepts already familiar to business and
to Revenue. This is so that the measures
■ Adopting complex measures set out in the
could be understood in their application and
European Union (EU) Anti-Tax Avoidance
provide for certainty of outcomes once they
Directive (ATAD) in a manner which
are in effect.
represents a best fit for Ireland’s tax
existing tax system. ■ Ireland’s transfer pricing regime
The complexity of adopting ATAD measures We foresee that transfer pricing will become a
into Ireland’s tax regime arises in part more central part of Ireland’s corporation tax
because of the judgments necessary to apply regime providing both protections for Ireland
general provisions in the Directive in a to assert its taxing rights on profits arising
manner that meets a minimum standard of from international trade by Irish based
providing equivalent protection. Our analysis businesses as well as protecting its domestic
considers how this standard of protection tax base.
might operate, in practice, when ATAD
■ Framing a tax regime which offers greater
measures are applied in the wider
simplicity to taxpayers operating in an
environment of Ireland’s tax system and
international environment
interact with protections already in Ireland’s
regime. Adopting a foreign branch exemption regime
which is available at the election of taxpayers
Through a series of suggestions related to
and introducing an exemption regime for
each ATAD measure, we have made
certain foreign dividends should simplify
recommendations on implementing the
Ireland’s tax regime for Irish based business
measures in a manner that we believe fits
seeking to grow internationally.
Ireland’s corporation tax regime and is
aligned with existing protections in Ireland’s We have also suggested changes that could
tax system. be made to Ireland’s existing capital gains
exemption regime for gains on disposals of
We believe that our suggestions, if
substantial shareholdings.
implemented, should preserve the relative
competitiveness of Ireland’s tax regime post Our approach
adoption EU-wide of ATAD measures while
meeting the required minimum standard of Our recommendations are detailed and technical
protection. in nature because we consider that detailed
consideration is required to implement changes
We have attempted to identify implementation to these important aspects of Irelands’
approaches and legislative changes that build corporation tax regime in a manner that provides
i
greatest certainty for taxpayers and, where These tax rate differences have, in the past,
possible, simplifies its operation in a number of served to provide protections against the
key respects. potential base erosion of Ireland’s domestic tax
base. In circumstances where additional
We consider that adoption of the measures set
protections are introduced under the adoption of
out in this submission could provide an
ATAD anti-base erosion measures as well as
environment where Ireland ultimately adopts a
changes which we have proposed to Ireland’s
single 12.5% corporation tax rate applying to all
transfer pricing regime, we suggest that
profits subject to corporation tax. This
protections based on higher corporation tax rates
simplification in the operation of Ireland’s regime
are no longer required.
is one which we believe Ireland should aspire to
achieve within the next few years. We recommend that, once these additional
protections are in place, Ireland should remove
The United Kingdom (‘UK’) offers a single,
the higher tax rates from its corporation tax
reduced rate of 19% on all profits subject to
regime so that a simplified, and more powerful,
corporation tax for all companies whatever their
corporation tax 12.5% regime remains. This
size or ownership. The striking simplicity and
regime can better compete in attracting and
power of the UK tax policy choice on corporation
retaining investment in an international context.
tax can be seen when you compare its regime
with an Irish corporation tax regime that has Our suggestions in relation to the adoption of
different tax rates for trading income, non-trading ATAD measures, changes to Ireland’s transfer
income and capital gains and a different effective pricing regime and moving to a more territorial
tax rate for certain profits earned by closely-held regime seek to achieve, over time, an
companies. appropriate balance of different protections so as
support this necessary simplification of Ireland’s
existing corporation tax regime.
ii
Executive summary
The summary below provides a high level overview of KPMG
recommendations made in response to the consultation
questions. Our response is grouped into three areas which are
reflected in three different sections in this submission. They
follow the main themes of the consultation being our response
and recommendations in relation to: Ireland’s adoption of
measures under the EU Anti-Tax Avoidance Directive (ATAD);
transfer pricing matters; and, moving to a more territorial regime
by introducing an exemption regime for certain foreign dividends
and adopting an elective branch exemption regime. The final
section also includes suggestions in relation to the simplification
of Ireland’s regime for affording foreign double tax credit relief
where an exemption does not apply. Some of the sections refer
to supplementary materials that are included in Appendices.
SECTION 1:
Anti-BEPS MEASURES CONTAINED IN ATAD
the test does not require that activities be
Question 1: General Anti-Abuse Rule carried on with a view to realising a profit.
Revise the definition of “business” at subsection
(1)(a) so that it is not limited to any trade,
In order to more perfectly align the Irish General profession or vocation but includes other
Anti-Abuse Rule (‘GAAR’) with the minimum business activities.
standard framework set out under ATAD, we Make expressly clear that the reference to
suggest changes should be made to section 811C, double taxation relief which is set out in
Taxes Consolidation Act 1997 (TCA 1997) as subsection (4)(d) includes relief, if applicable,
follows: for foreign taxes.
Delete subparagraph (II) of subsection (2)(b)(i)
which provides that a taxpayer must meet both Question 2: Controlled Foreign
a tax avoidance test and a business test. This is
because ATAD GAAR provides that GAAR does Company (CFC) rule
not apply if a taxpayer meets the genuine
arrangements test (i.e. even if there is a tax
avoidance purpose). The following is an overview of the key features we
suggest should be reflected in a CFC rule. We
Revise the application of the “business”
believe that this approach is both aligned with
exception test at subsection (2)(b)(i)(I) so that
Ireland’s international tax policy objectives, avails
1
of appropriate flexibility under ATAD and meets the genuine economic activities test under the
ATAD minimum standard of protection. suggested gateway tests.
Adopt one of three permitted approaches under Apply a simplification approach to achieve a
ATAD which limits the CFC rule to income proportionate reduction in compliance burden
which has been artificially diverted to the CFC. when calculating the effective tax rate of the
Apply the framework set out at subparagraph CFC under Irish tax principles by taking as a
2(b) of Article 7, ‘the Option B approach’. starting point the timing of recognition of the
income in the accounts of the CFC in its
Under Option B, define “essential purpose to functional currency for the tax accounting
obtain a tax advantage” as set out in ATAD to period. Apply Irish capital gains tax principles to
mean a purpose of artificially diverting income to compute capital gains in the local functional
the CFC. Provide a safe harbour that, if the currency to avoid distortions caused by currency
activities of the CFC are in the nature of a trade movements.
under Irish tax principles, the taxpayer can
assume that arrangements that form part of that Apply permitted exclusions by excluding from
trade have not been put in place with the scope subsidiaries with accounting profits of no
purpose of artificially diverting income. more than EUR 750,000 and non-trading
income and non trade related capital gains of no
Apply a gateway to exclude from the scope of a more than EUR 75,000 as well as subsidiaries
CFC rule arrangements that meet the genuine whose accounting profits amount to no more
arrangements test. If this gateway is failed, the than 10% of operating costs for the period.
taxable CFC income is limited to amounts
generated through assets and risks which are Avoid double taxation by providing credit relief
linked to significant people functions carried out for taxes on CFC taxable income for foreign
by the Irish controlling company. taxes which are equivalent to corporation tax,
including EU CFC charges on the same profits.
To provide additional protection from artificial Provide double tax relief if profits assessed to
diversion of income, where the income of the tax under the CFC regime are later received as
CFC is non-trading in character under Irish tax a taxable dividend or realised as part of a
principles, there is an alternative gateway test if taxable capital gain on disposal of a CFC.
the purpose test is failed. This gateway requires
the CFC to meet a genuine economic activities Provide transitional relief to the Irish parent for
test. If this is failed, the non-trading income (not subsidiaries acquired from third parties by not
already taxable in Ireland) is in scope of the applying the CFC rule to the acquired subsidiary
CFC rule. The genuine economic activities until the second tax accounting period post
carve out means that this protection operates in acquisition.
a manner which is aligned with EU freedoms.
Develop the CFC legislative measures in close
A subsidiary is potentially a CFC where the Irish consultation with businesses and tax
parent meets a greater than 50% ownership test practitioners to ensure they can operate as
which is set by reference to percentage of intended across different business sectors in
votes, share capital, entitlement to profits on Ireland. Support implementation with detailed
winding up and distributable profits as well as a guidance developed in conjunction with
company included in a consolidated accounting business and tax practitioner representatives.
group of the Irish parent.
Apply with prospective effect to CFC income of
Apply the CFC rule to the tax exempt profits of companies for tax accounting periods beginning
foreign branches where Ireland applies a on or after 1 January 2019.
foreign branch exemption regime.
Preserve Ireland’s tax treaty obligations related
to capital gains of treaty resident CFCs.
Question 3: Exit taxation
Provide for a White List of excluded countries
solely as a basis to reduce the taxpayer burden
of calculating for each taxable period the Having reviewed the framework for the exit taxation
effective tax rate of each subsidiary. This would regime set out in Article 5 and in the recitals to the
not allow the taxpayer to presume that the CFC Directive, our recommendations for revisions to
had met either the genuine arrangements or Ireland’s existing exit tax regime are as follows.
2
Apply a 12.5% rate of corporation tax to the
measure of the exit gain where the asset was in Question 4: Hybrid mismatch
use for the purposes of a trade. (The capital measures
gains tax rate of 33% currently applies to an exit
gain).
Apply transfer pricing principles to the exit gain We recommend that Ireland adopts the following
by pricing the market value of the asset upon approach to implementation of hybrid mismatch
import and exit using transfer pricing principles measures.
set down in the OECD Guidelines on transfer
pricing. Implements the framework under ATAD without
going beyond that framework i.e. does not apply
Measure the exit gain in the functional currency hybrid mismatch counter measures to payments
of the company (using an average exchange to jurisdictions with a nil tax rate nor to
rate to translate the taxable measure in mismatches arising from transfer pricing
functional currency into Euros to arrive at the adjustments.
exit tax payable amount).
Implements the main measures with effect from
Apply an uplift in tax basis to the market value 1 January 2020 and potentially adopts the
(established under arm’s length principles) of an extended implementation deadline of 1 January
imported chargeable asset, whether imported 2022 for reverse hybrid measures.
from EU Member States or third country
jurisdictions. Excludes the securitisation regime set out at
section 110, TCA 1997 from the general scope
Extend exit tax events to the transfer of an of the measures but instead adjusts the anti-
asset to a foreign tax exempt branch (in the hybrid measures already contained in section
event that Ireland moves to adopt a foreign 110 so that they are aligned with the ATAD
branch exemption regime) and more generally regime.
broaden the scope of exit taxation events to
align with the four exit taxing events described Applies the ATAD hybrid mismatch approach to
in Article 5. This includes removing the concept the design of a branch exemption regime i.e.
of an excluded company from the existing does not provide for a branch exemption under
regime. domestic law unless the profits of the foreign
branch are subject to tax in the branch
In order to meet the ATAD minimum standard, jurisdiction.
potentially remove the ability to postpone the
entirety of the exit charge under section 628, Applies the ATAD hybrid mismatch approach to
leaving only the possibility which is permitted the design of a dividend exemption regime i.e.
under ATAD of deferring the payment over a 5 does not apply a dividend exemption where the
year period (which is given under section 628A). payor has claimed a deduction for the dividend
payment.
Apply domestic reliefs including the substantial
shareholding gains exemption available under Excludes lease receipts from the scope of the
section 626B, TCA 1997 in determining the secondary defensive measures as such receipts
amount of the chargeable exit gain. are already included in taxable income.
Adopt permitted exceptions for temporary Avails of the permitted exemptions to exclude
certain ‘on-market’ repo transactions, certain
transfers of assets in certain financial services
loss absorption regulatory capital instruments in
transactions. the banking sector, and defined collective
investment vehicles from the scope of the
Adjust the manner of operation of the relief
measures.
under section 634, TCA 1997 to align with
CJEU case law and exit tax principles. Treats as included in income payments which
are taxed in another jurisdiction in the relevant
period even if not taxed upon the same entity as
the entity which is considered to be the taxable
recipient from an Irish perspective.
Designs measures after close review and
analysis of international tax developments,
3especially in jurisdictions such as the United Provides detailed implementing guidance to
States of America (US) (which has seen a major provide certainty for taxpayers on the scope and
reform of its tax regime including international application of the measures.
tax matters).
Consults with business and tax practitioners,
including review of draft legislative measures
prior to enactment, to ensure that the measures
are understood across business sectors and
achieve their intended effect.
SECTION 2:
IRELAND’S TRANSFER PRICING REGIME
In recognition of the position faced by
Question 5: Key considerations businesses who already operate in an
when incorporating the 2017 OECD international environment where the 2017
Transfer Pricing Guidelines Guidelines are applied, allow for early adoption
by taxpayer election for 2018 or 2019 tax
accounting periods.
We consider that the 2017 OECD Transfer Pricing application to intra group financing transactions,
Guidelines (‘the 2017 Guidelines’) are the Ireland should not seek to change its current
appropriate reference point for Ireland’s transfer approach to transfer pricing of financing
pricing rules: arrangements until there is international
■ From a defensive perspective in asserting consensus on how Article 9 (of the OECD
Ireland’s right to tax profits associated with the Model Tax Convention) applies to capital and
control of risk and oversight of DEMPE debt.
functions by Irish based decision makers. It is important that Ireland continues to actively
■ In protecting Ireland’s domestic tax base by engage in the OECD working group on pricing
adopting transfer pricing guidance which is financial transactions and capital in order that its
consistent with the outline approaches views can be taken into account as the OECD
suggested in this submission in relation to works to develop consensus in this area.
adoption of an EU compliant CFC regime and
application of the authorised OECD method of
exit taxation measures.
attribution of profits to branches,
■ To reduce the risk of double taxation and
We suggest that Ireland adopts the authorised
uncertainty for taxpayers which could arise
OECD approach to the attribution of profits to
where Ireland’s framework for transfer pricing is
branches both in the case of Irish branches of
out of line with the framework adopted by its
non-tax treaty resident entities and in the case
major trading partners.
of foreign branches of Irish residents that are
Considerations for adoption include: not located in tax treaty jurisdictions.
timing of implementation with adequate their application to the pricing of transactions in
advance notice of adoption for taxpayers, capital assets within the corporation tax regime,
and
If a decision is taken in 2018 to adopt the 2017
Guidelines, a mandatory date for adoption readiness for adoption on the part of business
should apply no earlier than 2020. and Revenue.
The operative date should be signalled as soon
as possible in 2018.
4that do not exceed the EU size definition of a small
Question 6: Arrangements that were or micro entity1.
agreed before 1 July 2010 If it decided to extend transfer pricing rules to
medium sized enterprises, we suggest that:
It would be appropriate to include within the scope
Safe harbour approaches are introduced which
would not require transfer pricing
of the transfer pricing regime those arrangements
documentation to be prepared where a
which are still in place that were agreed before 1
transaction is within the scope of defined safe
July 2010 (‘grandfathered arrangements’). This
harbour transactions and potentially also safe
should be done with prospective effect and not
harbour pricing ranges.
require the application of transfer pricing
adjustments to past transactions under Medium sized entities can avail of a lighter
grandfathered arrangements. touch minimum documentation standard than
We suggest that this approach is followed, with one that which applies to larger taxpayers.
exception. This is in relation to loan arrangements Optional adoption is made available to those
with a defined loan maturity date which we suggest SMEs that seek to put in place Irish transfer
should not be re-priced until the pre-existing loan pricing arrangements e.g. to align their Irish
agreement has come to an end. position with that which applies to group
It is not generally required that a loan arrangement members in other jurisdictions that apply full
is re-priced for transfer pricing purposes once the local transfer pricing requirements.
terms and conditions of the loan arrangement do
Early announcement and potentially deferred
not change and the loan remains in place between
adoption for smaller companies in comparison
the same counterparties.
to larger companies to allow smaller companies
greater time to review intra group transactions
and to put appropriate transfer pricing
documentation in place.
Question 7: Extension of transfer
pricing rules to SMEs
Question 8: Extending domestic
The existing scope of application of Ireland’s transfer pricing rules to non-trading
transfer pricing regime should be retained to apply income
to entities within groups that exceed the EU size
thresholds for SMEs.
This appears to achieve an appropriate balance The difference in corporation tax rate between the
between the risk of loss of tax revenues from 12.5% rate of tax on trading income and the 25%
mispricing of transactions in cross border trade rate of tax on non-trading income means that the
between group members of SMEs with the application of transfer pricing to non-trading income
complexity and administrative burden associated could result in an outcome which is not neutral for
with meeting transfer pricing requirements. This transactions between two taxpayers within the
also avoids the potential adverse impact on scope to Irish corporation tax. This is
Revenue’s transfer pricing resources of notwithstanding that this is neutral from a transfer
administering compliance for a higher volume of pricing perspective as the understated income of a
transfer pricing cases if the regime is extended to counterparty which is subject to a transfer pricing
enterprises of a smaller scale. adjustment is matched by the overstated income of
the corresponding party to the transaction.
If transfer pricing is extended to smaller
enterprises, it should not be extended to entities Developments in an EU test case on the non-
application of transfer pricing provisions to
1
A small enterprise is defined as an enterprise which employs
fewer than 50 persons and whose annual turnover and/or
annual balance sheet total does not exceed EUR 10 million.
5transactions between domestic taxpayers suggests The amount of expenditure eligible for capital
that the non-application of transfer pricing to such allowances on assets acquired from non-
transactions is not in breach of EU fundamental resident group members.
freedoms.
These changes should not affect the continuing
If the positive December 2017 decision of the application of capital gains tax provisions to
Advocate General is upheld by the Court of Justice transactions by individuals where market value is
of the European Union (CJEU), Ireland could applied to measure the taxable disposal proceeds
reframe its transfer pricing regime and: on chargeable assets and the assets are not being
apply transfer pricing to non-trading held as part of a trade or business undertaking.
transactions, but
not apply transfer pricing to transactions
between domestic taxpayers.
Question 9: Transfer pricing
documentation requirements
By adopting this approach, Ireland’s regime could
both be more robust in protecting against potential
misuse in the context of cross border mismatches
arising from differences in transfer pricing whilst In order to balance the protections afforded by
remaining compliant with EU freedoms. having robust documentation standards applicable
in Ireland to transfer pricing which meet
At a minimum, if the AG’s opinion is upheld by the international norms with the documentation
CJEU, it should support the application of simplified compliance burden for taxpayers, we consider that
procedures for transactions between domestic it would be appropriate to:
taxpayers as compared to the regime applicable to
transactions with taxpayers outside the charge to Require transfer pricing documentation to be
Irish tax. prepared no later than the due date for the filing
of the corporation tax return for the tax
If it is decided to retain transfer pricing for
accounting period in which the relevant
transactions between domestic taxpayers,
transaction was reflected.
legislative change of a procedural nature could be
made to avoid the disproportionate impact of the Impose the full scope of the transfer pricing
differences in tax rate between trading and non- documentation requirements which are
trading income. described in the final report under Action 13 of
This would include: the BEPS Project on taxpayers who are within
the scope of the Country-by-Country (CbyC)
Measuring the corresponding adjustment in like reporting requirements.
manner and applying the same rate of tax for
the counterparty companies. Issue guidance on the expected scope of
documentation to be included in the master file
Providing relief for corresponding adjustments and local file balancing information
on a current period basis and on a self- requirements of use to Revenue with the burden
assessed basis for taxpayers. associated with documentation preparation. The
guidance could allow for appropriately adjusted
Extending transfer pricing approach to capital documentation requirements to apply to smaller
transactions multinationals.
We suggest that it would be appropriate to apply
transfer pricing principles to the measurement of:
In keeping with current Irish best practice in
relation to transfer pricing documentation,
The market value consideration which is applied Ireland’s formal adoption of transfer pricing
in measuring the disposal consideration of documentation requirements should be aligned
chargeable assets under the Corporation Tax with OECD guidelines and should not impose
Acts. additional requirements solely for Irish transfer
pricing purposes.
We suggest that this approach should be
adopted in tandem with the application of a In circumstances where an Irish taxpayer has
12.5% rate of corporation tax to chargeable access to transfer pricing documentation which
gains arising on the disposal of chargeable is aligned with the OECD standard and covers
assets in use for the purposes of a trade. the transaction that the Irish entity is party to,
Ireland continues its current practice of not
6requiring that the company itself must prepare transactions. A number of possible approaches
the documentation or that the documentation are set out in our response to Question 7 (as
must be in Ireland, once it can be made safe harbours can be expected to provide
available to Revenue. greatest proportionate relief for enterprises of a
smaller scale).
Adopt safe harbour approaches to transfer
pricing. A taxpayer is not required to prepare Should transfer pricing be extended to SMEs, in
pricing documentation where a transaction falls accordance with OECD guidance, SMEs should
within scope of a defined safe harbour. only be required to provide information about
their material cross-border transactions upon a
Safe harbours also benefit Revenue as they
specific request from Revenue in the course of
reduce the administrative burden of reviewing
a tax audit or for transfer pricing risk
pricing documentation for agreed safe harbour
assessment purposes.
SECTION 3:
ADOPTING A TERRITORIAL REGIME
Apply Ireland’s exit taxation regime to accruing
Question 10: Suggestions for an capital gains on assets transferred from an Irish
elective branch exemption and taxable presence to a foreign tax exempt
dividend exemption regime branch.
For maximum flexibility, make available the
branch exemption regime at the election of
Outline of suggested Irish branch elective companies, on a branch-by-branch basis.
exemption regime
Relief would not be available for foreign taxes
We suggest that Ireland could move to adopt a on branch profits where the exemption regime
branch exemption regime which would be available applies.
at the election of taxpayers along the following
lines: Relief would not be available for branch losses
against Irish profits where the branch exemption
Exempt from tax profits arising from a trade applies. This is with the exception of any ‘final’
conducted through a foreign branch in any and otherwise unused losses arising on the
jurisdiction outside Ireland. Exclude countries ‘liquidation’ or unwind of the foreign branch. In
which are included on an EU blacklist of accordance with EU case law precedents, these
jurisdictions which do not meet acceptable losses should remain available for use against
corporate tax governance standards. Irish profits.
The exemption is available only where the Transitional measures related to past branch
branch is engaged in the conduct of a trade. losses would apply in moving to adopt a branch
exemption regime and also where a taxpayer
Apply Ireland’s CFC regime to the foreign makes a future election to apply the exemption
branch profits exempt from Irish tax.
regime to a previously loss making branch.
Exemption is not available where the branch is These essentially provide that the exemption
not recognised as a taxable presence in the from Irish tax is available to the extent the
branch jurisdiction i.e. the branch exemption branch profits exceed branch losses previously
would be available only where the profits of the offset against Irish profits.
branch can be said to be subject to tax in the
In circumstances where a taxpayer conducts a
foreign jurisdiction.
business through a transparent entity such as a
The exemption extends to branch profits partnership and the business gives rise to a
whether in the character of income or capital taxable branch presence abroad, the corporate
gains arising to the branch. partner should be entitled to the branch
exemption on its share of the foreign branch
7profits provided that the partner’s indirect Simplify the operation of tax credit relief for
interest in the branch’s profits represents a dividends paid from the profits of indirect
holding of at least 5%. subsidiaries by calculating tax credits on a
pooled basis for the profits of a holding
Outline of dividend exemption regime
company and its subsidiaries.
We suggest that a dividend exemption regime
In the case of Ireland’s tax credit regime for
should apply as follows:
royalties, we suggest that Ireland adopts the
Apply to dividends where the Irish resident following simplification measures:
company has a direct or indirect interest of at Rewrites the legislative measures which
least 5% in the company from which the underpin the operation of the credit relief regime
company is ultimately sourced. for royalties to make them easier to read and
To be eligible for exemption, the dividend more straightforward to administer in practice.
(which may be tracked through any number of Provides clarity on the scope of royalty
intermediary layers of company) should be paid payments that are eligible for the relief in the
by a company which is resident for tax purposes context of payments for services.
in a jurisdiction to which Ireland’s substantial
shareholding exemption on capital gains applies Clarifies the entitlement of the company to
i.e. tax treaty jurisdictions. deduct excess and unused creditable foreign
taxes on royalty income under general
A dividend exemption should not be available principles.
where the payor has secured a tax deduction
for the dividend. Ireland could also improve the competitiveness of
its regime for credit relief on royalties by enhancing
For tax exempt dividends, tax relief would not its regime but it is recognised that these changes
be available for taxes borne on payment of the may have cost implications. These include:
dividend or for taxes borne on the profits from
calculating the net income measure (which
which the dividend is paid.
operates to limit the amount of credit relief) by
Section 3 includes detailed suggestions in relation reference to net margins from the royalty profits
to the simplification of Ireland’s existing double tax instead of by reference to the margins of the
credit relief regime for foreign taxes on branch trade as a whole,
profits, dividends and royalties.
offsetting excess unused credits against other
In the case of branches, these include: income of the trade, and
Providing certainty on the deductibility of foreign pooling surplus tax credits to carry forward for
tax as an expense of the trade in the case of use in future periods.
branch losses.
We suggest different approaches to introducing
Amending paragraph 9FA, Schedule 24, TCA enhancements to balance Exchequer costs.
1997 so that Ireland’s unilateral credit pooling
In tandem with adoption of a branch and dividend
relief for tax credits on branches can operate as
exemption regime, Ireland should review the
intended.
operation of its corporation tax exemption for
Providing for the operation of credit relief on a capital gains on disposals of substantial
pooling basis for branches operating in shareholdings to provide greater certainty that
business sectors (such as insurance) with corporation tax only applies once within a corporate
business profit cycles which can apply over holding structure. This could include changes to:
periods of 7 to 10 years.
the substantial shareholding exemption at
In the case of dividends it is suggested that Ireland section 626B, TCA 1997
should:
repeal section 591A, TCA 1997 which applies to
Permit taxpayers to track and attribute tax ‘abnormal dividends’, and
credits to dividends solely by reference to a
clarify the interpretation and application of the
taxpayer election which is not tied into
scope of corporate reorganisation and
resolutions made under local company law.
reconstruction reliefs especially where
Change the manner of operation of credit relief shareholders are otherwise tax exempt on
under paragraph 9I, Schedule 24, TCA 1997. income and gains from the company.
8SECTION 1: Anti-BEPS measures contained in ATAD
SECTION 1: Anti-BEPS MEASURES CONTAINED IN ATAD Consultation on Coffey Review
Introduction
Introduction
In Section 1, we set out our response to Questions 1 to 4 of the consultation on
matters for Ireland to consider upon implementation of anti-avoidance measures
contained in ATAD. These include a General Anti-Abuse Rule, a Controlled Foreign
Company rule, exit taxation and hybrid mismatch measures.
Ireland will need to adopt a complex set of measures in ATAD which are only framed in
general terms in the Directive. This requires careful consideration of how the measures
could best fit into Ireland’s existing corporation tax system. In recognition of this
complexity, our comments and suggestions in response to Questions 1 to 4 are
technical and detailed in nature.
We believe that our response illustrates that, diverted to entities outside the charge to Irish tax.
notwithstanding the complexity, Ireland can This has led to the suggested approach for
implement ATAD measures in a manner which is adoption of a CFC rule.
consistent with the existing framework of its
Ireland’s corporation tax regime is focused on
corporation tax regime.
providing certainty of taxation for taxpayers whilst
We believe that this can also be done in a manner remaining in line with international best practice
that future proofs Ireland’s regime when we look and meeting its obligations under EU law.
ahead to the potential interaction of ATAD
Given the complexity associated with
measures with future changes to Ireland’s transfer
implementation of ATAD measures and the
pricing regime as well as the possibility of moving
relatively short timeframe for adoption, we urge that
to a more territorial regime.
policy makers and Revenue work closely with
In framing our suggestions for adoption of the industry and tax practitioners in implementing the
ATAD measures, we have assumed that Ireland measures. This should include consultations based
will adopt changes that we have suggested in our on draft legislative measures. By testing the
response in Section 2 of this document on transfer operation of draft legislative measures against
pricing matters and will also move to adopt an outcomes across a range of business sectors
exemption regime for foreign branch profits and which operate in Ireland, businesses and Revenue
certain foreign dividends (discussed in Section 3). alike can be confident that the measures, when
implemented, will fit within Ireland’s tax regime in a
In order to test if the suggested policy and technical
manner that is understood and provides certainty of
choices in adopting ATAD measures represent a
outcomes.
best fit for Ireland’s existing system, we have
sought to identify to commonalities between the We have anticipated that, at a future date, Ireland
principles underlying ATAD measures and the will also move to adopt a further ATAD measure
policy principles which form part of the framework which is a general interest limitation rule. Where
of Ireland’s regime. relevant, we have considered how adoption of
other ATAD measures could potentially impact the
One of the most important of these principles is
future adoption of an interest limitation rule and
that Ireland only seeks to tax profits which are
have included comments in the relevant part of our
attributable to activities carried on in Ireland except
response.
in circumstances where profits have been artificially
10SECTION 1: Anti-BEPS MEASURES CONTAINED IN ATAD Consultation on Coffey Review
Question 1: General Anti-Abuse Rule
Question 1: Matters to consider on implementation of a General
Anti-Abuse Rule (GAAR)
Overview
of GAAR
of suggested approach to implementation
The approach and design of Ireland’s General Anti-Avoidance Regime (GAAR) at section 811C, Taxes
Consolidation Act 1997 (TCA 1997) is aligned in a number of ways with the GAAR which is set out at
Article 6 of ATAD. It requires some changes to align it more perfectly.
Under ATAD, GAAR is focused on counteracting the abuse of corporate income tax measures.
Ireland’s GAAR covers a range of taxes beyond corporation tax including income tax, capital
acquisitions tax, stamp duty, and more.
At recital 11 to the Directive, it is stated that ‘Within the Union, GAAR should be applied to
arrangements that are not genuine; otherwise the taxpayer should have the right to choose the most
tax efficient structure for its commercial affairs.’
In order to more perfectly align the Irish GAAR with the minimum standard which is set out in the
recital to the Directive and the framework for GAAR set out in Article 6, we suggest the following
changes should be made to section 811C:
Delete subparagraph (II) of subsection (2)(b)(i) which provides that a taxpayer must meet both a
tax avoidance test and a business test. This is because ATAD GAAR provides that GAAR does
not apply if a taxpayer meets the genuine arrangements test (i.e. even if there is a tax avoidance
purpose).
Revise the application of the “business” exception test at subsection (2)(b)(i)(I) so that the test
does not require that activities be carried on with a view to realising a profit,
Revise the definition of “business” at subsection (1)(a) so that it is not limited to any trade,
profession or vocation but includes other business activities.
Make expressly clear that the reference to double taxation relief which is set out in subsection
(4)(d) includes relief, if applicable, for foreign taxes.
11SECTION 1: Anti-BEPS MEASURES CONTAINED IN ATAD Consultation on Coffey Review
Question 1: General Anti-Abuse Rule
Detailed overview of GAAR
In the table below, we have set out a high level overview of the features of the ATAD GAAR regime which
are described both in the recitals to the Directive and in Article 6. We have compared these with the
features of the Irish regime which are set out under section 811C, TCA 1997.
Alignment
of Irish Features of ATAD GAAR regime
regime
GAAR has a function to fill in gaps which should not affect the applicability of
specific anti-abuse rules.
This is how Irish GAAR has been applied.
Taxpayer has the right to choose the most tax efficient structure for its commercial
affairs.
This is set out in recitals to the Directive. This principle is well established and
applied under Irish case law.
GAAR applies to transactions with domestic, EU and third country counterparties in
a uniform manner. The application of GAAR in a domestic and cross border context
does not differ.
The Irish provisions apply to the Irish tax consequences of arrangements with Irish
and non-Irish counterparties.
Penalties can apply under GAAR.
ATAD GAAR is confined to corporate income tax.
Section 811C applies to a broad range of Irish taxes including corporation tax.
Application of genuine economic arrangement test to all business activities
(including potentially financial activities). If the taxpayer satisfies the genuine
economic test, GAAR does not apply.
The scope of the genuine economic arrangement test is framed as a business
exception test under Irish GAAR and requires both that a business related test is
satisfied and that the purpose of the transaction was not to give rise to a tax
advantage. The scope of business activities is limited only to those activities that
are undertaken with a view to realising a profit and which are considered to be in
the nature of a trade, profession or vocation for Irish tax purposes.
?/X ATAD GAAR applies only where both of the following apply:
■ there is an arrangement or series of arrangements which have been put into
place for the main purpose or one of the main purposes of obtaining a tax
advantage that defeats the object or purpose of the applicable tax law, and
■ they are not genuine having regard to all relevant facts and circumstances in
that they are not put into place for valid commercial reasons which reflect
economic reality.
This means that under ATAD GAAR will not apply where the taxpayer meets the
genuine economic arrangements test.
12SECTION 1: Anti-BEPS MEASURES CONTAINED IN ATAD Consultation on Coffey Review
Question 1: General Anti-Abuse Rule
Alignment
of Irish Features of ATAD GAAR regime
regime
Under section 811C, Irish GAAR may not apply if both tests set out under
subparagraphs (2)(b)(i)(I) and (II) are met.
Subparagraph (I) requires that the transaction “was undertaken …with a view to the
realisation of profits in the course of the business activities of a business carried on
by the person.”
Business for this purpose is defined at subsection 1(a) to mean “any trade,
profession or vocation” which includes a subset only of the broader range of
potential business activities.
The application of the business test appears not to be aligned with the framework
for ATAD GAAR in two respects. The first is to require a profit realisation motive
and the second is to confine the definition of business to a subset only of business
activities.
The second test under subparagraph (II) further requires that the transaction “was
not undertaken primarily to give rise to a tax advantage”.
ATAD is clear in not requiring a taxpayer to meet an additional tax avoidance
purpose test where there are genuine arrangements that are in place for valid
commercial reasons which reflect economic reality.
A tax advantage under GAAR is one that defeats the object or purpose of the
applicable tax law.
A tax advantage under section 811C is very widely defined but an exception is
provided (at subsection (2)(b)(ii)) to disapply section 811C where the transaction
did not result directly or indirectly in a misuse of the provision or an abuse of the
provision having regard to the purposes for which it was provided.
Affords reliefs from double tax where relevant.
Subsection (4)(d) of section 811C provides for relief from double taxation. All other
?/
references in section 811C are to taxes administered by the Irish Revenue.
It would be welcome to have clarity that the reference to relief from double taxation
could also include double taxation arising by reason of the imposition of foreign and
Irish taxes to the same item.
The in scope transaction is ignored and re-characterised for domestic tax
purposes.
This is the consequence for the relevant Irish taxes where a transactions falls
within the scope of section 811C.
13SECTION 1: Anti-BEPS MEASURES CONTAINED IN ATAD Consultation on Coffey Review
Question 1: General Anti-Abuse Rule
As can be seen from the comparative overview of tax advantage. Unlike ATAD, it is not sufficient that
the key features of Irish GAAR and the GAAR the taxpayer has met the genuine arrangements (or
framework set out in recitals to ATAD and in Article business exception) test.
6 of the Directive, many aspects of Ireland’s regime
We suggest that subparagraph (II) should be
are aligned with the framework of the regime set
deleted in order to meet the Directive’s
down in the Directive. This is with the exception of
requirements for a GAAR that applies a consistent
areas which are identified above and which are
standard EU-wide and that is also aligned with EU
discussed further below.
case law precedents.
a. ATAD GAAR does not apply to genuine
b. Aligning the ATAD genuine arrangements
arrangements
test with section 811C business exception
The framework for GAAR as set out in the Directive test
involves the imposition of a two part test to each
The business exception test that is set out at
transaction. This is that there is a motive to avoid
subparagraph (I) is the formulation adopted in Irish
tax and, further, that there are not genuine
law of the genuine arrangements test set out in the
arrangements which are defined by reference to a
Directive. It provides that the economic reality
requirement for sufficient economic reality to be
exception which is described at Article 6(2) is
associated with the transaction. Where the genuine
available under section 811C in relation to
arrangements test is satisfied, the Directive
transactions effected with a view to realising profits
provides that GAAR should not apply.
in the course of business activities in the nature of
It is clear from the wording in recital 11 to the a trade, vocation or profession. We suggest that
Directive that this formulation for GAAR is to apply the operation of this exception could be more
throughout the EU i.e. in a consistent manner EU- perfectly aligned with the Directive where the profit
wide. Recital 11 states that ‘Within the Union, making motive is deleted and the definition of
GAAR should be applied to arrangements that are business is extended to include other business
not genuine; otherwise the taxpayer should have activities.
the right to choose the most tax efficient structure
This might be done as follows:
for its commercial affairs.’
■ By deleting the words “with a view to the
This formulation of the GAAR test is broadly
realisation of profits” from subparagraph
consistent with case law from decisions of the
(2)(b)(i)(I) to read as follows “was undertaken
Court of Justice of the European Union (CJEU) 2
…with a view to the realisation of profits in the
which has established the standard for the
course of the business activities of a business
application of anti-abuse measures as one which
carried on by the person.”
requires “a wholly artificial arrangement which does
not reflect economic reality”. ■ By reframing the definition of “business” at
subsection (1)(a) to read as follows: “business
The genuine arrangements test in the Directive is
activities which include but are not limited to
framed as a business exception test in Irish
a trade, profession or vocation”.
legislation. It is set out in in two parts in subsection
(2)(b)(i)(I) and (II) of section 811C. Unlike the This broadening of scope of the definition of
framework for GAAR under the Directive, the business appears to be better aligned with the test
second part of the test in Irish law which is set out in ATAD but also with the meaning of economic
at subparagraph (II) requires the taxpayer also to activities that has been considered by the CJEU in
meet a motive test of the transaction not being recent findings of the court on review of anti-abuse
undertaken or arranged primarily to give rise to a measures in the domestic law of Member States3.
2
The leading case which established this principle is Cadbury related to the requirement that the company was engaged in
Schweppes case, C-196/04. This principle has been endorsed defined economic activities). The manner of definition of the
by the CJEU in more recent cases in which it has considered economic activities under German law was found not be aligned
the application of various domestic anti-abuse measures by with the EU principle that anti-abuse measures could apply in
Member States. See later footnotes for further details. the case of a wholly artificial arrangement which does not reflect
3
economic reality. At para 73 (referenced in para 97), the CJEU
In the 20 December 2017 decision in the joined cases of found “The fact that the economic activity of a non-resident
Deister Holding (C-504/16) and Juhler Holding (C-613/16), the parent company consists in the management of its subsidiaries’
CJEU reviewed anti-abuse measures in German domestic law assets or that the income of the company results only from such
which sought to deny relief from dividend withholding tax on management cannot per se indicate the existence of a wholly
dividends paid by German resident companies unless the non- artificial arrangement which does not reflect economic reality”.
resident parent company met a number of tests (one of which
14SECTION 1: Anti-BEPS MEASURES CONTAINED IN ATAD Consultation on Coffey Review
Question 1: General Anti-Abuse Rule
c. Clarifying operation of double taxation relief We foresee that one area of EU jurisprudence that
for non-Irish taxes where GAAR applies is likely to evolve in future is the question of the
interaction of domestic GAAR provisions and the
Finally, in order that it is clear that Irish GAAR can
double tax treaty obligations of Member States.
operate equally in a domestic as well as a cross
This international aspect of the application of
border scenario4 (e.g. involving EU or third country
GAAR is relevant to GAAR as it operates in the
counterparties), it would be useful to expressly
context of ATAD which focuses on international
confirm that the reference to double taxation in
aspects of corporate income tax regimes. We
subsection (4)(d) of section 811C includes double
recommend that Ireland’s tax policy makers
taxation which might arise by reason of the
continue to monitor the development of EU
imposition of both foreign and Irish tax to the same
jurisprudence on the application of general anti-
item.
abuse measures, both as it relates to the
We suggest that this refinement is particularly application of GAAR but also as it potentially
important in the context of Ireland’s requirement to affects Ireland’s tax treaty policy.
respect freedoms available under the Treaty for the
Functioning of the European Union in the
implementation of any measures under a directive Implementation risks
including GAAR5. It is clear from this evolving line
We have summarised in the table below possible
of EU case law, that domestic anti-abuse measures
implementation risks that could arise when seeking
(including affording relief from double taxation)
to meet the minimum standard under ATAD for a
should be applied in an equivalent manner to
GAAR that should apply EU-wide on a consistent
comparable transactions with resident and non-
basis to target abuse of corporate income tax
resident counterparties.
measures.
Related matters In the following table, we have described possible
Subject to the suggested changes outlined above, consequences arising from the identified
we consider that the interpretation of Ireland’s implementation risks and how the risks have been
GAAR can continue to evolve based on precedents addressed by our suggested implementation
that can emerge from judgments handed down by approach.
the Irish courts as well as by the CJEU.
4
Recital 11 to the Directive provides that ‘It is furthermore of dividend withholding tax to dividends paid to certain non-
important to ensure that GAARs apply in domestic situations, residents) was found to be higher for certain non-resident
within the Union and vis-à-vis third countries in a uniform shareholders than for domestic recipients of dividends. This
manner, so that their scope and results of application in difference in approach in the application of domestic anti-abuse
domestic and cross-border situations do not differ’. measures under German and French law was found to
5
represent a barrier to the freedom of establishment. It is clear
In the joined cases of Deister Holding (C-504/16) and Juhler from this evolving line of EU case law that domestic anti-abuse
Holding (C-613/16) (German cases) and in the Eqiom and Enka measures should be applied in an equivalent manner to
case (C-6/16) (a French case), the CJEU found that anti-abuse comparable transactions with resident and non-resident
measures in domestic law in Germany and France respectively counterparties.
were in breach of EU freedoms. The cases dealt with measures
which related to the payment of dividends by resident
companies to non-resident companies. The burden of proof for
the German or French taxpayer (related to the non-application
15SECTION 1: Anti-BEPS MEASURES CONTAINED IN ATAD Consultation on Coffey Review
Question 1: General Anti-Abuse Rule
Implementation risk Consequence Addressing risk
Not perfectly aligned with Uncertainty for taxpayers and Deleting the second part of the
ATAD regime. Revenue alike in the business exception test in Irish law
application of domestic GAAR which requires a taxpayer with genuine
measures if the ATAD GAAR arrangements to also satisfy a primary
framework and evolving EU purpose tax advantage motive test
case law precedents on the which does not apply under ATAD
application of GAAR in an EU GAAR.
context are based on
Clarifying that the genuine economic
measures which diverge from
arrangements test can apply to
the domestic framework6.
business activities other than those
undertaken with a profit motive and is
not limited to activities in the course of
the conduct of a trade, profession or
vocation.
Clarifying that double tax relief is also
available, where applicable, for double
taxes arising by reason of double
taxation from the application of Irish
and foreign taxes to the same item.
Not perfectly aligned with Risk of legal challenge to Proposing the adjustments outlined
ATAD. existing cases which are being above should not affect the scope of
litigated through the courts existing cases which are in the process
under notices of opinion raised of being litigated through the courts
under section 811C (and its under section 811C (or the former
pre-cursor, section 811). version of Irish GAAR under section
811) as they should apply with
prospective effect.
6
“Measures taken by the Member States for the prevention of fraud and abuse must be appropriate for attaining that objective and
must not go beyond what is necessary to attain it” (para 56, decision dated 20 December 2017 of the CJEU in the joined cases of
Deister Holding (C-504/16) and Juhler Holdings (C-613/16) which concerned German anti-abuse measures related to withholding tax
on dividends and its application in the context of the EU Parent Subsidiary Directive (90/435/EEC).
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